Rob: 00:00

Welcome to the Inside public accounting podcast, a brand new show where we talk about the numbers the narratives inside the accounting profession. I'm Rob Brown of your co host, and today we're diving into one of the biggest forces shaping the accounting profession. It's private equity. And we're thrilled to be joined by my co host, Chelsea summer. She's the voice and face of data here at the inside public accounting organization. Chelsea you and I both launched Episode One last week, and we gave people a taste of what's coming up. You're really excited about the show, aren't you?

Chelsea: 00:32

I am thrilled. Thanks, Rob. I'm excited to be here, excited to be doing this podcast, and really excited for today's topic. I think private equity is something that you cannot have a conversation, or you cannot be at a be at a meeting, or read anything without that popping up somewhere. I think the profession is thirsty for information on what it means, what's happening, and excited to be the ones to start tackling that.

Rob: 00:57

Well, you're in a brilliant position, because you actually gather the data. There's a lot of opinions and hype and conversations going on out there, suppositions, people making up all kinds of stuff, and really nobody knows what's happening. So we start to look behind the numbers. So we positioned it last week as a teaser, and we're going to dip into it because you have found some research. Well, you've done some, you've just wrapped up a survey of 150 firms on this very topic. So let's start here. Why focus on private equity now?

Chelsea 1:24

Yeah, so we launched the survey because while there's a lot of noise out there, there's not enough clarity. We wanted to hear directly from managing partners and leaders across the country. How are they experiencing this, this shift, and what's working and what's what parts of it are still unknown. This is not only a financial story, but it's also a cultural one and a strategic one. Private Equity is pushing firms to grow and scale like businesses, which is could be a positive or it could certainly have some some negatives to that, but it's also raising real concerns about autonomy, morale and sustainability in a firm, it's felt like the right time to take a pulse of the accounting profession and try to understand, is private equity changing for the better, or is it just changing?

Rob: 02:08

You can't go a day without seeing a private equity story. There's more deals, there's more headlines, more questions from family leaders, what is the play of private equity? Is it for good or for bad in the whole profession, and what it means for people, the clients, the future of public accounting. So as you say, it's not just gossip. This is strategic value here. So let's start with the survey. We had 163 firms, many led by managing partners. What were you hoping to uncover with this data?

Chelsea: 02:38

Yeah, so there's been a lot of information and commentary about private equity. Some of it's really enthusiastic, some of it strongly opposed. And everyone's got an opinion, haven't they? Everybody's got an opinion. And the people who feel feel in the middle, or typically, the quiet ones, we didn't have a clear sense of like, where the majority is, because those those proponents or opponents are the most vocal. So so we asked, we asked the leaders, are you excited? Are you skeptical? Are you waiting to see how this plays out? Spoiler, yes, the goal is to move beyond the extremes of the responses and the feedback and understand where really the center of gravity is, what firm leaders are actually thinking, feeling and watching as this trend evolves.

Rob: 03:17

And our viewers listeners are going to be curious to get their hands on this data very quickly. So let's answer that question for them. This is going to be available on the inside public accounting website, Chelsea, right?

Chelsea: 03:28

Yes, yes, it is available.

Rob: 03:31

I've had a little sneak at the data, and it seems the responses are split on whether private equity is raising the bar and a force for good or not. So what does that even split tell us about where we're at today?

Chelsea: 03:44

Yeah, so about 39% of firms said, Yes, it is raising the bar. About 39% of the firms said it's really too soon to tell, and about 23% of the firms said, No, it's not raising the bar. It's really telling that the data is so evenly split, the profession is still trying to figure out what is happening and what these investments really mean. It's clearly a big force, but there's no consensus whether it's a net positive or a long term risk. To me, that divide reflects a profession that's in transition and is really trying to figure out who it wants to be and where it wants to go. Some firms are really leaning into private equity as a way to modernize, access capital, bring in operational discipline, increase technologies, but others are more cautious and worried about things like cultural erosion and short term thinking and a loss of autonomy. So what the split in the evenness of the data tells us is that the story isn't finished. It's still unfolding. Leaders are watching closely. But it's not just about being for or against private equity. It's about trying to understand what actually it means to be private equity backed in today's environment, and what that's going to mean moving forward.

Rob: 04:54

And I'm just thinking the story of King Canute trying to hold back the waves. Do you remember that story? You can't really. Against private equity and say it's bad, it's coming, it's here, and it's coming hard, and it's very much a part of the profession. Now, that's not going away. So we're here trying to help people understand what it actually means to be private equity backed, or trying to stay independent and resisting the lure of the money, because it's shaking everything up. Now, cultural concerns keep coming up. Chelsea, loss of autonomy, increased pressure for short term profit. How real are these risks, and how are private equity firms doing anything to address them, if at all?

Chelsea: 05:30

Yeah, so the concerns are real, and they came through. We had some open ended questions on our survey, and there was a lot of concerns. Firm leaders are worried that private equity could could push for short term profitability at the risk of the long term values that the firms have been built on, the culture and the trust with their clients. That's a real risk. Whether that makes sense to still move forward. Is a firm by firm decision, there's still a space for those firms who who say no, thank you, and we would like to remain independent, and I think carving out and realizing those risks helps those firms to be able to position themselves in the future. The risks aren't guaranteed outcomes, though. They're warning signs, and the firms that have private equity investment that succeed are the ones that take those cultural dynamics and those risks seriously. They're more than just hitting growth targets. It means investing in your people and maintaining people and maintaining transparency through the process and and being thoughtful on how their decisions are affecting both their staff and their clients. The firms that navigate this well will be the ones that balance the discipline with what makes an accounting firm a firm. It's not just a financial asset. It's a delicate line, but it is one that's absolutely critical if private equity wants to be a long term positive force in the profession.

Rob: 06:45

It's so well put I was fascinated to see that the data seems to show that private equity backed firms. They grow faster, they run leaner, they're much more efficient. And you wonder how sustainable that is. And you even wonder what the exit plan is for private equity, and is there some kind of burnout risk coming down the line. What are your thoughts on that?

Chelsea: 07:04

Yeah, as somebody who lives in the numbers world, it's too soon to say we haven't seen the long term plays yet to see that play out in the numbers. But I think that is a big question. And yes, the numbers are impressive, but in my mind, How sustainable are they? Can we keep those growth goals up year after year after year, there's been a lot of merger and acquisition activity that pool of potential targets are going to start shrinking, and at some point there is not as many viable acquisition targets. There's definitely a risk of burnout with productivity expectations if they keep rising without the right support systems in place. That's where things like unique staffing models or using outsourcing just different ways to achieve new goals, I think are those support systems that are needed. Growth alone doesn't necessarily mean success, especially if it's leading to fatigue and cultural erosion and burnout and loss of staff. Sustainable success is more than just tightening your margins and having a lot of acquisition deals. It means keeping your people engaged and maintaining the quality that your clients are used to.

Rob: 08:14

And one of the reasons private equity is getting such traction is because of the aging profession. You and I not particularly planned to talk about this, but 75% of CPAs are add up close to retirement age, and they need to get out somehow. They need to pull equity out of the firm if they've got equity pots in there. So private equity is giving them a way to get out. And what we're seeing now out with it, younger people coming through, they're not willing to pay into an equity pot and play that game. So do you just comment on that briefly, inside or outside the data that you've seen?

Chelsea: 08:44

Yeah, yeah. And I'm not sure that we've seen anything through the data on that, yeah, but it's certainly something that we're hearing. And I've heard conversations with managing partners saying, you know, we're we used to have 30 equity partners at our firm. Maybe it's one of the right number moving forward. And we have seen in the numbers the growth in non equity partners. So trying to find those individuals and giving them a path that doesn't include equity ownership if that's not what they're interested in. And I think, I think everything that's happening right now is a yes, and so yes, we need to do this, and we need to do something else. So I think that that's part of a strategy is rethinking what equity partnership looks like in a firm, what ownership looks like, and saying what worked for the previous generations may not work for the coming generations. As the resident millennial, the values are different and the goals are different, and what we want from our lives are different. And I think firms that succeed are going to look at that and honor that and create new paths forward for those individuals.

Rob: 09:44

And accountants don't change very quickly, very easily. Accounting has been debits and credits for 1000s of years, pretty much. So I wonder. Are some people out there thinking, is this something they should care about? Is it, is it a passing trend? Is it just a headline or. Is this a game changing disruptor that's here to stay? What would you say to them?

Chelsea: 10:04

Yeah, I think you're right, that accounting has been, has been fairly slow moving. There's been some signposts of things that have shifted, shifted the profession rapidly, and I think this is one of them. I think it is a game changing trend. Whether your firm has a private equity investment or considering it or not, it's not just about those firms doing the deals. I think private equity is reshaping expectations around growth and operations and Talent Management and what it means to be and to run a modern accounting firm, and what it means to be an accounting firm partner, even if you're not taking investment, you're not competing in a profession where a lot of firms are, and that's raising the bar, both in investments in tech and thinking differently about your strategies. So yes, it is a headline issue, but I think right clearly show because it's a structural shift in the accounting profession. If you're leading a firm today, you can't afford to not you can't afford to ignore it. I think it is going to be there.

Rob: 10:54

Yep. And if you are leading a firm that's trying to stay independent, you're competing with firms that if they're private equity backed, they've got much bigger war chest. They can afford to pay talent more, they can afford to market more, so they've got a lot more to play with, even though there's going to be a price to pay for that equity that's been injected into the firm. So yeah, this is a big play, and all people on all sides of the fence need to be aware of what's going on, don't they?

Chelsea: 11:20

Yeah, absolutely. We've seen those firms who are, who are choosing to stay independent, start to have some unique strategies to compete with those, whether they're like whether they say we are going to stay small and we are going to stay in our niche and we are going to heavily invest in what we are good at. That's a strategy. We've seen some giant combinations of firms saying, well, we can't compete against these super large national firms, but if five of us come together, we can now compete. We are now, you know, entering in the top 100 we've seen firms come together in accounting associations and just new ways of thinking about pooling resources together to combat those deep war chests of those firms who have private equity investment.

Rob: 12:07

And a quick note on the global scene, I'm here in the United Kingdom. You're there in the USA, yeah, accounting is very much a global profession, international professional bodies, and there's so many membership organizations, alliances, networks, firms joining together to increase collective buying power and pass business to one another. So this show very much has an international scope, doesn't it?

Chelsea: 12:30

Yeah, absolutely, absolutely, those referral sources, I think, will be key moving forward.

Rob: 12:34

Yeah, now the full reports on your websites under the IPA insights tab, you got a lot going on on your website. So just tell us exactly where people can find it on the website. Chelsea, yeah, yeah.

Chelsea: 12:45

If you go to inside public accounting.com under our IPA insights tab, you will see the private equity story that we've been talking about today, along with the opportunity to purchase larger reports of information, including some preliminary insights from our practice management survey that we're currently conducting, and we want our listeners to be part of the conversation. Share your views on the private equity what your firm's considering, what you're seeing in your market. You can comment directly on our podcast page@insidepublicaccounting.com or leave us a thought in LinkedIn, or a comment on our YouTube if you're watching us on YouTube. Yeah, we very much welcome the feedback.

Rob: 13:22

And I'm sure we're going to get a lot of questions and remarks on this private equity issue, which we'll revisit. Won't we, as more and more data comes to light, but we're going to leave this topic for this week, and next week, we're going to be previewing the IPA 500 this is your flagship ranking of the top accounting firms in the country. Chelsea, this is a big moment in your calendar, isn't it?

Chelsea: 13:42

It absolutely is. It is the highlight of my year. 19 500 rankings are one of the most anticipated things that we release all year. It's not just a ranking, but a snapshot of where the profession is right now and where it's headed, super relevant to the conversation we've had today. There's a lot of shifts in the in the rankings, because of some private equity investments, because of the big mergers that we've talked about. So excited to highlight some of those changes for firm leaders, it's a chance to benchmark themselves against their peers and see emerging trends, how the landscape is shifting, and whether that's through mergers and acquisitions or service lines or talent dynamics. Every year, new storylines emerge that help the firms think more strategically about their future. So it's a big moment, and I'm excited to share some early insights next week.

Rob: 14:26

We Can't Wait, and it's beautiful that we've got this podcast now as a vehicle to bring this to life, because it's traditionally lived on your website, but I know you've been itching to talk about it and breathe life into the stories behind the data for a while, haven't you?

Chelsea: 14:40

Yes, absolutely, very excited to get to expand the individuals that we speak to and speak to it in a new way.

Rob: 14:46

Well, that's all for this episode of Inside public accounting podcast. Don't forget to follow and subscribe, share this show with somebody in your team who's watching these trends unfold. We're building the listener base, the audience on the show. So we really appreciate you engaging. Management and get involved and backing us here as we bring a brand new offering to the podcast market. So we'll see you next time on the inside. Public accounting podcast on behalf of the our production team and Chelsea and myself. Have a really good week, and remember, we're just giving you information. You've got to take action on it. You've got to do something with it. You've got to share it with your team. Otherwise, you're just coming out the bigger brain. We're looking for better strategies, more application of what's going on, and we'd love to hear your stories on how this is affecting you. We'll see you next time on the podcast.